Digital Envoy Inc., v. Google Inc.,

Filing 192

Case 5:04-cv-01497-RS

Document 192-2

Filed 06/08/2005

Page 1 of 4

EXHIBIT A

( C

T 7

I (7 )

P

6

Case 5:04-cv-01497-RS -- Amendment No . Prepared by R .R. Donnelley Financial Document 192-2 2 toFiled 06/08/2005 Form S-l

Page agof1 4 f 13 0 2e o

S-1/A 1 dsla.htm AMENDMENT NO.2 TO FORM S-1 Table of Contents
index to Financial Statement s As filed with the Securities and Exchange Commission on June 21, 200 4 Registration No. 333- 114984

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

AMENDMENT NO . 2
O

FORM SREGISTRATION STATEMEN T
Under

The Securities Act of 1933
GOOGLE INC .
(Exact name of Registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 375 Primary Standard Industrial lassification Code Number) 7-0493581 I.R. S. Employer dentification Number)

1600 Amphitheatre Parkway Mountain View, CA 94043 (650) 6234000
(Address, including zip code, and telephone number, Including area code, of Registrant's principal executive offices )

Eric Schmidt Chief Executive Office r Google Inc . 1600 Amphitheatre Parkway Mountain View, CA 94043 (650) 6234000
(Name, address, including zip code, and telephone number, including area code, of agent for se

Copies to :

Larry W. Sonsini, Esq. David J. Segre, Esq . Wilson Sonsini Goodrich & Rosati Professional Corporation 650 Page Mill Road Palo Alto, Califo rn ia 94304-1050
[phone]

David C . Drummond, Esq . Jeffery L. Donovan, Esq. Anna Itoi, Esq . Google Inc. 1600 Amphitheatre Parkway Mountain View, CA 94043
[phone]

William H. Hinman, Jr., Esq . Simpson Thacber & Bartlett LLP 3330 Hiliview Avenu e Palo Alto, California 94304
[phone]

Approximate date of commencement of proposed sale to the public : As soon as practicable after the effective date of this Registration Statement . If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"), check the following box . u If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. u

hq ://www.sec .gov/Archives/edgar/data/1288776/000119312504105564/ds l a .htm

/8/200 5

lr

T T O

P

6

Prepared by R.R. Donnelley Financial -- Amendment No . 2 to Form S-1

Case 5:04-cv-01497-RS

Document 192-2

Filed 06/08/2005

Pagea3eof14 130 g 1 of

Table of Contents Index to Financial Statement s There has been a trend toward industry consolidation among our competitors, and so smaller competitors today may become larger competitors in the future . If our competitors are more successful than we are at generating traffic, our revenues may decline . We face competition from traditional media companies, and we may not be included in the advertising budgets of

large advertisers, which could harm our operating results.
In addition to Internet companies, we face competition from companies that offer traditional media advertising opportunities . Most large advertisers have set advertising budgets, a very small portion of which is allocated to Internet advertising. We expect that large advertisers will continue to focus most of their advertising efforts on traditional media . If we fail to convince these companies to spend a portion of their advertising budgets with us, or if our existing advertisers reduce the amount they spend on our programs, our operating results would be harmed .

We expect our growth rates to decline and anticipate downward pressure on our operating margin in the future.
We expect that in the future our revenue growth rate will decline and anticipate that there will be downward pressure on our operating margin . We believe our revenue growth rate will decline as a result of anticipated changes to our advertising program revenue mix, increasing competition and the inevitable decline in growth rates as our net revenues increase to higher evels . We believe our operating margin will decline as a result of increasing competition and increased expenditures for all aspects of our business as a percentage of our net revenues, including product development and sales and marketing expenses . We also expect that our operating margin may decline as a result of incre ases in the proportion of our net revenues generated from our Google Network members. The margin on revenue we generate from our Google Network members is generally significantly less than the margin on revenue we generate from advertising on our web sites . Additionally, the margin we earn on revenue generated from our Google Network could decrease in the future if our Google Network members require a greater portion of the advertising fees.

Our operating results may fluctuate, which makes our results difficult to predict and could cause our results to fall short of expectations.
Our operating results may fluctuate as a result of a number of factors, many of which are outside of our control . For these reasons, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance . Our quarterly and annual expenses as a percentage of our net evenues may be significantly different from our historical or projected rates . Our operating results in future quarters may fall below expectations . Any of these events could cause our stock price to fall . Each of the risk factors listed in this "Risk Factors" section, and the following factors, may affect our operating results : · · · · · · · ur ability to continue to attract users to our web sites . ur ability to attract advertisers to our AdWords program . ur ability to attract web sites to our AdSense program . he mix in our net revenues between those generated on our web sites and those generated through our Google Network. he amount and timing of operating costs and capital expenditures related to the maintenance and expansion of our businesses, operations and infrastructure . ur focus on long term goals over short term results . he results of our investments in risky projects .

http ://www.sec .gov/Archives/edgar/data/1288776/000119312504105564/d s 1 a.htm

/8/2005

c

W

6

Prepared by R .R. Donnelley Financial -- Amendment No . 2 to Form S- 1

Case 5:04-cv-01497-RS

Document 192-2

Filed 06/08/2005

Pagea4eof 4of 13 0 P g 55

Table of Contents Index to Financial Statements Although our operating margin was greater in the three months ended March 31, 2004 compared to the year ended December 31, 2003, we believe that our operating margin will decline in 2004 compared to 2003 . We believe the decrease in operating margin will result from an incre as ed port ion of our net revenues being generated through our AdSense pro gram, and fro m an anticipated increase in costs and expenses, other than stock-based compensation, as a percentage of net revenues in 2004 compared to 2003 . This expected incre ase in the portion of our net revenues generated through our AdSense pr ogram is a result of an an ticipated increas e in the port ion of ad clicks that occur on Google Network member web sites compared to our Google web sites, as we incre as e the number of Google Network members. In other words, net revenues earned through our Google Network members under our relatively newer Google AdSense program are growing more rapidly th an those earned through our Google web sites . The operating margin we realize on revenues generated from the web sites of our Google Network members through our AdSense program is significantly lower th an that generated fr om paid clicks on our web sites. This lower operating margin arises because most of the advertiser fees from our AdSense agreements are shared with our Google Network members, leaving only a portion of these fees for us . The lower operating margin also results from the higher costs attributable to the additional sales and information systems infrastructure required to secure and manage our Google Network . The expected incre as e in costs and expenses, other than stock-based compensation, as a percentage of net revenues is primarily a result of building the necessary employee and systems in frastructures required to m an age the an ticipated growth of our compan y . This anticipated decline to our operating margin is expected to be partially offset by a decre as e in stock-bas ed compensation as a percentage of net revenues in 2004 compared to 2003 . e have a large an d diverse b as e of advertisers an d Google Network members. No advertiser generated more th an 3% of our net revenues in e ith er 2001, 2002, 2003 or in th e three months ended March 31, 2004 . In addition, no Google Network member accounted for more than 5% of our net revenues in 2002, 2003 or in th e three months ended March 31, 2004 . We expect our bas e of adve rt isers and Google Network members to remain large and diverse for the foreseeable future . We have experienced an d expect to continue to experi ence substan tial growth in our operations as we seek to exp and our user, advert iser an d Google Network members b as es an d continue to expand our presence in inte rnational markets . This growth has required th e continued expansion of our human resources and substantial investments in property and equipment. Our full-time employee headcount h as gr own fr om 284 at December 31, 2001, to 682 at December 31, 2002, to 1,628 at December 31, 2003 and to 1,907 at March 31, 2004 . In addition, we have employed a signi fic an t number of temporary employees in the p as t an d expect to continue to do so in the foreseeable future . Our capital expenditures have grown from $131 million in 2001, to $37 .2 million in 2002, to $176 .8 million in 2003 an d to $86.0 million in the three months ended March 31, 2004 . We currently expect to spend at least $250 million on capital equipment, including information technology in frastructure, to m an age our operations during 2004 . In addition, we an ticipate that th e gr owth rate of our costs an d expenses, other than stock-bas ed compensation, may exceed the growth rate of our net revenues during 2004 . M an agement of this grow th will continue to require the devotion of signific an t employee an d other resources. We may not be able to manage this growth effectively . In early 2003, we decided to invest signi fic ant resources to begin th e process of comp rehensively documenting and analyzing our system of internal controls . We have identi fied areas of our internal controls requiring improvement, an d we are in the process of designing enhanced processes and controls to address any issues identified through th is review . Are as for improvement include streamlining our domestic an d intern ational billing processes, further limiting inte rnal access to ertain data systems and continuing to improve coordination across business functions . During our 2002 audit, our external auditors brought to our attention a need to incre ase restrictions on employee access to our advertising system and automate more of our financial processes . The auditors identified these issues together as a "reportable condition," which me ans th at these were matters that in th e auditors' judgment could adversely affect our ability to record, process, summarize an d report finan cial data consistent with the assertions of man agement in our financial statements . In 2003, we devoted signi fican t resources to remediate an d improve our internal controls. Alth ough we be lieve that these efforts have strengthened our internal controls an d addressed th e concerns that gave rise to the "reportable condition" in 2002, we are continuing to work to improve our internal controls, including in the areas of access and securi ty. We pl an
47

http ://www.see .gov/Archives/edgar/data/ 1288776/000119312504105564/ds 1 a.htm

/8/2005